Commentary: IPO changes KPMG's business model

As KPMG goes public,
they will need to dramatically change their business practices.

3 January 200212:43 am GMT

As KPMG (and other "Big Five" systems integrators) go public,
they will need to dramatically change their business practices.

From Wall Street's point of view, the problem with the systems integration
business model is that it's either feast or famine. Whenever systems
integrators ramp up for the next big initiative
(ERP, e-commerce, CRM, and so on), they add staff to fill the demands of a
rapidly growing market. But then the second round of business is often too
small to sustain that investment.

We expect the harsh glare of Wall Street scrutiny to expose the inherent
volatility of traditional integrator business models and force significant
changes.

The demands of being a public company will change integrators in many ways.
One key change is the need to hit quarterly financial targets, which will
force integrators to be even more aggressive
in sales activities. In addition, smoothing revenue streams will force
integrators to explore outsourcing and software business opportunities.

Integrators have been considering outsourcing models for years, but few have
taken the plunge. They have also flirted with software as a business, but
their initiatives in this area have generally failed. However, a convergence
of services, outsourcing and software businesses may provide integrators
with a powerful new opportunity: complex online business hubs.

Business hubs can be viewed as the intersection of traditional integration
services with outsourcing, enabling integrators to host the customized
software installations they create for
clients. Many projects ultimately will look like on-ramps into these
business hubs, giving integrators a long-term income from their traditional
projects.

The test: retaining employees
KPMG has another potential problem to solve, however. The move from a
"partnership equity" model to a "market equity" model will stress
integrators' traditional employee retention practices. Integrators lost a
large number of key people to Web consulting start-ups during the e-commerce
boom. Although a sizable percentage of the flock is returning after the
"dot-bomb" experience (as much as 25 percent, by some estimates), we believe
that as KPMG goes public it will face a new retention challenge.

The fundamental tension faced by KPMG, and other IPO-minded integrators, is
this: Take the IPO money and invest in new business initiatives (such as
business hubs), or take the money and run (that is, funnel it into retention
initiatives).

Going public will force KPMG to begin disclosing new information (such as
project risk and business practices) that could prove vital to user
negotiation efforts. At the same time, however, users should expect a more
aggressive sales stance from integrators. Disciplined sourcing practices are
more critical than ever.

Customers should beware of the "wolf in sheep's clothing" syndrome. Big Five
companies will become much more aggressive at marketing as they turn public.
They will try to turn everything they do into an on-ramp to pull clients
into long-term contracts for more services.

Customers need to be sure, first, that those services are the best deal for
them and, second, that the Big Five can deliver on their promises.

Meta Group analysts Dale Kutnick, Peter Burris, Val Sribar, David Cearley
and David Yockelson contributed to this article.

Visit Metagroup.com for more
analysis of key IT and e-business issues.